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Pension drawdown legislation changes

Summary of Pension Legislation Changes

Pension legislation changes will become effective from April 2015. These changes ultimately allow investors much more freedom in the way withdrawals are taken from UK pensions. Below we will summarise the key changes highlighted in the legislation:

  •  Flexible access to pensions from age 55

Anyone with a defined contribution pension and who is age 55 or over in April 2015 will have the ability to drawdown their pensions however they wish. This change increases potential tax planning opportunities as you have the ability to choose a lump sum withdrawal or a periodic staged drawdown over time.  The first 25% withdrawn will be free of tax with the rest subject to income tax at your highest marginal rate.

  •  Removal of restrictions associated with pension drawdown

From April 2015, all restrictions and limitations placed on the amount of drawdown investors are able to take each year will be eliminated. With this option, the investor maintains control over the investment of the pension fund. And, it allows you increased flexibility on when and how much to drawdown and how you want to pass funds onto heirs. However, this option also bears some risk as it is no longer a secure annuity and requires careful management to ensure an investor doesn’t unknowingly deplete the account through excessive income drawdown. If you are already in income drawdown prior to April 2015 you will have the option to move to the new unlimited regime if preferred.

  • Restrictions on how much you can contribute during drawdown

If you are in flexible drawdown prior to April 2015, pension contributions may still now be allowable, but there is a reduced annual allowance of £10,000 per year. This allowance includes employer contributions and pension benefits accruing in a defined benefit scheme. There are two exceptions to being subject to the limited allowance: first, if the investor makes withdrawals from up to three small personal pension pots and an unlimited number of occupational pension pots each worth less than £10,000. Second, if the investor goes into capped drawdown before April 2015 and withdrawals after April 2015 remain within the limit.

  • Transferring a defined benefit pension to a defined contribution pension

Anyone with a defined benefit pension will be able to take advantage of the increased flexibility offered in the new legislation and make unlimited withdrawals. But, in order to do so, you will be required to transfer the assets to a defined contribution pension. In doing so, you could lose some very valuable benefits, so it will be important to take advice from your adviser before making this decision.

  • Increases in retirement age

From 2028, the age that you can begin drawdown on your pension will increase to 57 and will then increase in line with the State Pension age. This will not apply to Public Sector Pension Schemes for Fire-fighters, Police and Armed Forces.

  • Possible change in tax paid when pension passes to beneficiaries

Currently, if you are in drawdown, or you are age 75 or older, any lump sum paid to beneficiaries is taxed at 55%.  While this issue has not been settled, the Chancellor has promised a review in late 2014 of the rate at which tax is paid on pension lump sums at death. It is possible that this rate will be lowered and we will be sure to pay close attention to this going forward. As review, if you die before going into drawdown or buying an annuity, and before age 75, the entire pension fund is normally passed to your beneficiaries exempt from tax.

Please don’t hesitate to contact us if you have any questions about how these new rules affect you personally.

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